I know you. You probably clicked on this article just to prove me wrong. “I’m not making any money mistakes!” And that’s fine. You should totally be writing this blog instead of me, but humor me.
There are a million and one different ways to be financially literate, and I am not saying that one way is better than another, but my way is clearly the best.
Mistake #1: You don’t COMPLETELY understand how you are going to retire someday.
From what I see, people fall into one of these categories:
- Person A: They have no f-ing clue how they are ever going to retire. Their debt is higher than the national debt and they figure they will just work the rest of their lives. (don’t be this person)
- Person B: Person B brings in a steady paycheck and has minimal debt. She even contributes to her workplace 401K or XYZB but generally hopes that when she is 65, she will simply stop working and there will be enough money for her to retire. (don’t be this person either)
- Person C: Person C works hard. Has no debt (other than her mortgage), contributes the max to her 401K and XYZB (note: this is not a real thing). She thinks that when she is 65 she will be just fine.
NONE of these people actually know how they are going to retire. There is a vague understanding that you work until 65 and then everything magically falls into place. That’s what social security is for after all, right?
I don’t know about you, but I don’t plan on staking my future happiness on a government program that is constantly on the chopping block. Not to mention, I have already received letters reassuring me that I will be getting up to 75% of my social security earnings when I retire. 75% wow! When I first started working, it was 100%…. That’s not how numbers are supposed to work.
NOTE TO THE GOVERNMENT: a letter stating that I am not going to get the FULL amount of money that I have paid is NOT reassuring. In fact, it is the opposite of reassuring. It is UN-reassuring. That’s so not a word, but it should be.
Back to my point.
You need to know exactly how you are going to retire when you are ready to retire. This means you need to know the following:
a. how much money you will spend in retirement
b. where that money is going to come from
c. how you going to account for inflation and other life events
This brings us to mistake number 2.
Mistake #2: You don’t know how much you spend every month.
This is a scary one. I know. The logic is sound: if we don’t know how much we are spending every month than we can’t feel bad about it. Just like eating while standing up means that we are eating less calories.
I’m gonna let you in on a little secret: the money is still gone wether or not you know exactly where it went.
I know – that’s brutal. Many a time have I opened my credit card bill and righteously declared, “What is this $58 purchase! I never spent that!” Only to have my kill joy of a husband respond, “Isn’t that the camera thing you just had to have?” (side note – yes, I have a problem when it comes to buying camera things. I admit it. It is real. I’m working on it.)
So, I don’t care if you make a budget (personally, I hate budgets. The surest way for me to overspend is to make a budget, but if it works for you great) or simply track your spending. YOU MUST KNOW EXACTLY HOW MUCH YOU SPEND.
Mistake #3: You hold a balance on your credit card.
You’re credit card is like a game. If you hold a balance on it, you lose. If you pay it off every month, you win.
The way I explain it to my daughter is this: you know that stuffie you just can’t live without? The one that looks exactly like all the other stuffies in your room and costs $40? $40 that you don’t have. If you buy that on a credit card and don’t pay off your balance, that $40 stuffie now costs you $60! That’s right, $60. (yes, I know that is probably not entirely accurate, but she’s 9 so simpler is better).
Lets say, though, that you have that $40 sitting in your money jar in your room. If you buy that $40 stuffie using a credit card that has some sort of reward system (either cash back or miles), and then pay off that credit card entirely as soon as the bill comes in, that $40 stuffie now costs less (if you think about the reward negating some of the costs). OK, that’s a little complicated for a 9 year old, but you adults out there should get my drift.
The point is – don’t buy something on a credit card unless you have the money to pay for it in cash so you can pay off your card in full at the end of the month. If it is too tempting, then chop up that card. I’m serious. You lose if you don’t pay off your card. You know who you are losing to? Those multi-millionaires who run the credit card companies! Do NOT give them your money. They don’t need it. Take their money by never carrying a balance.
Its a fun game. Promise.
Mistake #4: Hiding your money under your mattress
Mom, I’m looking at you. Yes, I know that the stock market can be scary. It seems super risky to take your hard earned money and invest it in something that can (and will at times) lose value.
But guess what? Money hiding under your mattress is also losing value. Its a thing called inflation which means that every year your money will buy you less and less. Its like when your grandma tells you those stories about how in her days she would walk to the store 5 miles in the snow, uphill, to buy bread for a dime. That’s right. A dime for a loaf of break. I just spend $6 on a loaf yesterday.
The average inflation rate is 3.22%. This means that if your money is not growing by 3.22% each year, YOU ARE LOSING MONEY.
The stock market grows on average 7% per year (this is a conservative number and takes into account all those pesky downturns).
Here’s the math: 7% (growth) – 3% (inflation) = 4% growth per year
Now, I really don’t recommend getting all fancy and investing in different stocks. That IS risky. Just open up a Vanguard account and invest in the total stock market. Easy. Put your money in there and forget about it.
Mistake #5: Buying All Of The Things
Oh, retail therapy – you fickle vixen! You make us feel so good and then leave us wanting more.
Here is the big secret: buying things won’t make you happy.
The amount that you spend each month matters so much more for your retirement number than the amount that you save each month.
For example, lets say you only need to make $10 per year to live a happy life (Ha! I know, but I find it is easier to wrap my head around smaller numbers so bear with me). If your money is growing at a rate of 4% a year (see mistake #4) then you only need to have $250 invested in the total stock market to live happily ever after for the rest of your life!
$10 is 4% of $250
An easier way to calculate that big number that you need to retire is to multiply the money that you spend each year by 25.
10 x 25 = 250
If you spend less, you NEED less to retire. Every extra dollar that you spend each year means you need to save 25 more dollars.
If you need to buy a new pair of shoes every year for $100, you need to save an additional $2500 to maintain that habit.
This is a fun game to play every time you buy something. That latte just cost me $125. A new computer every year costs me $25000 in savings.
Buy less things – need less money – retire sooner 🙂
That’s it, folks. That’s all there is to it.
I’ve totally made all of these mistakes at some point or another so there is no shame in it. If you are making any of these mistakes, it’s not too late to fix it! Take an afternoon, sit down with your family, and figure this money thing out. The great irony is that once you do have a plan and are in control of your spending, you will feel so much happier. I promise.